UNITED STATES OF AMERICA
SECURITIES EXCHANGE ACT OF 1934
ACCOUNTING AND AUDITING ENFORCEMENT
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") be, and they hereby are, instituted against Michael J. Becker ("Becker"). Accordingly, IT IS HEREBY ORDERED that said proceedings be, and hereby are, instituted.
In anticipation of the institution of these administrative proceedings, Respondent Becker has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings herein, except that he admits the jurisdiction of the Commission over him and over the subject matter of these proceedings, Becker consents to the issuance by the Commission of this Order Instituting Public Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing A Cease-and-Desist Order ("Order").
On the basis of this Order and of the Offer of Becker, the Commission makes the following findings1:
Becker, of Marietta, Georgia, served as Vista's vice president-finance and administration from August 8, 1995 until March 8, 1996.
B. ISSUER INVOLVED
Vista 2000, Inc. ("Vista"), formerly located in Roswell, Georgia, designed, developed, manufactured and marketed consumer products including trigger guards for firearms and carbon monoxide detectors for homes. Vista's common stock, which was registered pursuant to Section 12(g) of the Exchange Act, was traded on the NASDAQ SmallCap Market system until it became listed on the NASDAQ National Market system ("NASDAQ") on February 13, 1996. On May 31, 1996, Vista's stock was delisted from the NASDAQ.
C. IMPROPER ACCOUNTING AND STOCK OWNERSHIP PRACTICES
1. Improper Accounting Practices During Vista's 1995 Third Quarter
On November 20, 1995, Vista filed its Form 10-QSB for the quarter-ended September 30, 1995 ("September 1995 Form 10-QSB"). The September 1995 Form 10-QSB was materially misstated because Vista failed to record two acquisitions, and certain revenues, expenses and assets in conformity with generally accepted accounting principles ("GAAP"). For example, Vista's net sales were overstated by 662%, its net income overstated by 138% and its assets overstated by 113%. Although Becker assisted in the preparation of the September 1995 Form 10-QSB, he refused to sign the report because he did not believe the financial statements included in this report complied with GAAP.
On or about July 31, 1995, Vista acquired Alabaster Industries, Inc. ("Alabaster"). Becker participated in the premature consolidation of the financial statements of Vista and Alabaster prior to Vista's acquisition of Alabaster on July 31, 1995. The results of Alabaster's operations should not have been consolidated with those of Vista until July 31, 1995. As a result, Vista failed to comply with GAAP when it included approximately $2,918,384 and $1,779,425 of Alabaster's net sales and net income, respectively, in Vista's September 30, 1995 financial statements.
On or about September 30, 1995, Vista acquired American Consumer Products, Inc. ("ACPI"). Becker participated in the premature consolidation of the financial statements of Vista and ACPI as of September 1, 1995, when he knew that Vista did not acquire ACPI until September 30, 1995. The results of ACPI's operations should not have been consolidated with those of Vista for this quarter. As a result, Vista failed to comply with GAAP when it included approximately $11,166,000 and $801,000 of ACPI's net sales and net income, respectively, in Vista's September 30, 1995 financial statements.
During the quarter ended September 1995, Vista improperly recorded numerous sales in its books from the purported shipment of products by one of its subsidiaries. Becker and Vista's then chief executive officer ("Vista's CEO") directed Vista's bookkeeper to record these shipments as sales even though the goods were not shipped until after the quarter had ended. As a result, Vista failed to comply with GAAP when it reported approximately $604,851 and $287,304 of net sales and net income, respectively, from these transactions during this quarter.
During the September 1995 quarter, Becker, at Vista's CEO's direction, recorded an unsubstantiated amount of cost of goods sold on the books of a Vista subsidiary without comparing this estimate to actual costs. As a result, Vista failed to comply with GAAP when it understated its cost of goods sold by $317,547 during this quarter.
Vista's earnings per share ("EPS") was materially overstated in its September 1995 Form 10-QSB because it was calculated using the annual weighted average number of shares outstanding. This method did not comply with GAAP. Instead, Vista's EPS should have been calculated using the weighted average number of shares of common stock outstanding during each quarter. (See APB Opinion No. 15, Earnings per Share, ¶ 47). Additionally, the EPS reported in the September 1995 Form 10-QSB was further materially overstated due to the misstatements of Vista's income as described above. As a result of all of these misstatements and miscalculations, Vista's EPS was overstated by 154%. Becker failed to take action to correct the misstated EPS even after having been alerted by Vista's counsel.
2. Failure to file stock ownership reports on Forms 3, 4 and 5
Becker never filed any stock ownership reports on Forms 3, 4 or 5 with the Commission although he was obligated to do so and was aware of his responsibility to file such reports.
D. VIOLATIONS OF THE FEDERAL SECURITIES LAWS
Section 10(b) of the Exchange Act and Rule 10b-5 prohibit material misrepresentations and misleading omissions in connection with the purchase or sale of securities. To prove a violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the Commission must prove that the defendants acted with scienter. Aaron v. SEC, 446 U.S. 680, 691 (1980). Scienter is a state of mind embracing intent to deceive, manipulate or defraud. Aaron v. SEC, 446 U.S. at 685 n.5. Reckless conduct is sufficient to establish scienter. SEC v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir. 1982). In the Eleventh Circuit, the scienter requirement may be satisfied by a showing of "severe recklessness." McDonald v. Alan Bush Brokerage Company, 863 F.2d 809, 814 (11th Cir. 1989).
To prove a violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder based on misrepresentations and misleading omissions, the Commission must prove that the subject misrepresentations or omissions were material. SEC v. Texas Gulf Sulfur, 401 F.2d 833, 848-50 (2d Cir. 1968), cert. denied sub nom., Coates v. SEC, 394 U.S. 976 (1969). A misrepresentation or omission is material if there is a substantial likelihood that under all the circumstances it would have assumed actual significance in the deliberations of a reasonable investor. Basic Inc. v. Levinson, 485 U.S. 224, 232 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). The magnitude of the overstatements of Vista's revenues, income, EPS and assets demonstrate that such overstatements are material. Becker knowingly participated in the recording and reporting of certain transactions which did not conform with GAAP. Although he did not sign the September 1995 Form 10-QSB, he assisted in its preparation and failed to halt its dissemination to the public or issue corrective disclosures to the public, thus committing violations of and causing Vista to violate Section 10(b) and Rule 10b-5.
Section 13(a) of the Exchange Act and Rule 13a-13 thereunder require certain issuers to file with the Commission quarterly reports containing financial statements prepared in conformity with the requirements of the Commission's rules and regulations. In addition, Rule 12b-20 under the Exchange Act requires that such reports contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made in those reports are not, under the circumstances, materially misleading. The requirement that an issuer file reports under Section 13(a) embodies the requirement that such reports be true and correct. SEC v. IMC International, Inc., 384 F. Supp. 889, 893 (N.D. Texas), aff'd, 505 F.2d 733 (5th Cir. 1974), cert. denied sub nom., Evans v. SEC, 420 U.S. 930 (1975). Because there is no scienter element involved in these provisions, see generally, SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978), a violation occurs when a materially false statement is filed. SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975). Becker caused Vista to violate Section 13(a) of the Exchange Act and Rule 13a-13 thereunder through his participation and/or acquiescence in the various misstated transactions.
Sections 13(b)(2)(A) and (B) of the Exchange Act require reporting companies to make and keep accounting records which accurately reflect their transactions and the dispositions of their assets, and to devise and maintain internal controls sufficient to allow the preparation of financial statements in conformity with GAAP. Following from these requirements, Section 13(b)(5) of the Exchange Act prohibits any person from knowingly circumventing or knowingly failing to implement a system of internal accounting controls, and from knowingly falsifying any book, record, or account, required under Section 13(b)(2). Rule 13b2-1 similarly prohibits any person from directly or indirectly falsifying or causing the falsification of any books, records or accounts required by Section 13(b)(2)(A). Becker committed violations of or caused Vista to violate these foregoing provisions through his participation and/or acquiescence in the various misstated transactions.
In analogous situations, the Commission has found similarly situated respondents to have caused an issuer's violations. E.g., In the Matter of Raymond J. Bily, Exchange Act Rel. No. 38296 (February 18, 1997), 63 SEC Docket 2599 (chairman and CEO liable for causing company's violations who knew that the company's reports were false and that its internal accounting controls were deficient and its books and records did not fairly reflect transactions relating to contingent purchase orders); In the Matter of Salant Corporation and Martin Tynan, Exchange Act Rel. No. 34046 (May 12, 1994), 56 SEC Docket 2046 (chief financial officer, vice president of finance and treasurer caused company to violate reporting provisions since he was aware of his company's undisclosed deteriorating financial condition); In the Matter of P. Andrew Baker, Exchange Act Rel. No. 36260 (September 21, 1995), 60 SEC Docket 0791 (secretary of corporation caused issuer's violation by signing false periodic reports).
Section 16(a) and Rules 16a-2 and 16a-3 of the Exchange Act requires directors and officers, and persons who own more than 10% of a registered class of a company's equity securities, to file reports of ownership and changes of ownership with the Commission. Any person who becomes subject to this requirement must file an initial report on Form 3 within 10 days of acquiring that status. Once the initial report is filed, any changes in holdings (e.g., purchase, sale, gift, exercise of options, etc.) must be reported on Form 4 by the 10th day of the month following the change. An annual report on Form 5 must be filed on or before the 45th day after the end of the issuer's fiscal year. Although obligated to do so, Becker never filed any of these reports with the Commission in violation of these provisions.
Based on the foregoing, the Commission finds that Becker committed violations of Sections 10(b), 13(b)(5) and 16(a) of the Exchange Act and Rules 10b-5, 13b2-1, 16a-2 and 16a-3 thereunder and was a cause of Vista's violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-13 thereunder.
In view of the foregoing, the Commission deems it appropriate to accept Becker's Offer.
IT IS ORDERED, pursuant to Section 21C of the Exchange Act that Becker cease and desist from committing or causing any violation and any future violation of Sections 10(b), 13(b)(5) and 16(a) of the Exchange Act and Rules 10b-5, 13b2-1, 16a-2 and 16a-3 thereunder and from causing any violation and any future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.
By the Commission.
1 The findings herein are made pursuant to Becker's Offer and are not binding on any other person or entity named in this or any other proceeding.